This Simple Investing Rule Will Save You from the Market Correction

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“The race is not always to the swift, nor the battle to the strong, but that’s how the smart money bets.”  -Damon Runyon

Like most really good quotations, Damon Runyon’s memorable reworking of Ecclesiastes 9:11 exists in a bunch of different versions. It’s one of my favorites in the cynical, wised-up style, taking an original bubble of sentiment that basically says, “You can do anything!” and puncturing it with a jab of common sense.

Runyon was a sportswriter and a lifelong gambler, so his use of “smart money” was no accident. The slightly shady characters he wrote about — the ones that formed the basis for the musical Guys and Dolls—all wanted to believe that they were savvier and more clued-in than the average mark, square or schmo.

Well, wouldn’t we all. There are lots of people who want to be right even more than they want to be rich.

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If you’re one of them, today’s your lucky day, because I’m going to give you one investing rule that will allow you to gain a reputation as a very savvy individual indeed.

One Simple Investing Rule

Here it is. In just 10 words.

Market goes up, get in. Market goes down, get out.

Those words are the basis of the Cabot market timing philosophy, an approach that has won the Cabot Growth Investor a spot near the top of the list for all market timers. It’s also the basis for the Cabot Emerging Markets Timer, which I use in writing the Cabot Global Stocks Explorer.

You wait for the market to go up before getting in for the same reason sailing ships wait for the tide to go out before they leave port. It’s also the reason people who want to go to a higher floor step on the up escalator rather than the one going down.

Of course it’s still possible to find advancing stocks when the markets are going down. If you had bought stock in Spirit Airlines (SAVE) at the beginning of October, before the S&P 500 began its 9% haircut, you would now (as of November 26) have a tidy 12% profit. But believe me, with the S&P 500 Index plummeting from 2,926 to as low as 2,632 during the same period, I had to wade through dozens of big losers to find the few stocks that were able to make any progress.

So why am I telling you about this seemingly obvious investing rule? Two reasons. First, it’s because the tide of the market is now against us. The S&P 500 was joined in its October-November hissy fit by the Nasdaq (down 12.3%) and the Dow (down 7.6%), and all three indexes are below their 200-day moving averages.

Translation: Escalator going down. Time to sell all but your strongest stocks and curtail new buying.

But the second reason for this investing rule is even more important. It’s that this market correction will continue until it wrings out enough hot money, dumb money and worried money from the market. And at that point, there will be an entire smorgasbord of attractively-priced stocks available to those who can recognize a new bull market in its infancy.

Just as getting out of a down market saves you money, getting into a new up market makes you money. And Cabot’s growth disciplines will tip you off about the new bull market buy signal while the dumb money is still groaning and holding its head, wondering what hit it.

So there you have it, a recipe for smartness in just 10 words. Market goes up, get in. Market goes down, get out.

And if you’d like to have a trustworthy advisor to let you know which way the escalator is running (and when it changes), a no-risk trial subscription to the Cabot Growth Investor or the Cabot Global Stocks Explorer will make sure you stay smart.

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Timothy Lutts

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*This post has been updated from an original version.


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